RESPONSIBLE BUSINESS

Module Topics to be covered

Syllabus
Ethical Responsibility of Business:
Module 1:  Definition and concept of ethics and business ethics;
(6 hours)  History of Ethics;
 Institutionalising Ethics; Code of conduct and ethics for managers, Ethical Committees;
 Significance and need for business ethic;
 Ethical Decision-Making.
Responsibility towards Consumers:
Module 2:  Consumer Duties and responsibilities;
(5 hours)  How are Indian Consumers Exploited;
 Legal Protection to Consumers; Consumer Protection Act, 1986.

Module 3: Responsibility towards Environment:

(5 hrs)  Environmental Preservation: Role of Stakeholders;
 Waste Management and Pollution Control;
 Key Strategies for Industrial Pollution Prevention;
 Managing Environmental issues.

Responsibility towards Society:

Module 4:  Theories of CSR: Trusteeship Model, Social Entity Theory; Pluralistic Model;
(6 hours)  Models of CSR: Ethical Model, Statist Model, Liberal Model&Stakeholder Model;
 Advantages of CSR; Scope of CSR;
 CSR of Stakeholders: Consumers and community, Employees and Owners;
 Steps to Attain CSR.
Corporate Governance for Responsible Business:
Module 5:  Definitions of Corporate Governance;
(8 hours)  Market Model & Control Model of Governance
 Issues in the corporate governance;
 Relevance of corporate governance;
 Benefits of good corporate governance to a corporation; Benefits to Society
 Concept of corporation and corporate;
 Characteristics of Corporation
 Theories of corporate governance- Agency Theory, Stewardship theory, Stakeholder and sociological theory, Criticisms;
 Good Corporate Governance: Obligation to Society: Obligation to Employees; Obligation to Customers;
 Corporate Governance Systems: The Anglo-American Model of Governance, The German Model of Governance, Indian Model of
Governance
 Readings
• Text Book
• Business Ethics and Corporate Governance, A.C. Fernando
(2010), 2nd edition, Pearson Education.
• Reference Books
• Business Ethics and Corporate Governance, CSV Murthy
(2009), 2ndedition, Himalaya Publication
• Business Ethics, William H Shaw (2013), 6th edition,
Cengage Learning
• Managing Business Ethics, Linda K. Trevino, Katherine A.
Nelson (2013), 5th edition, Wiley Publication
• Business Ethics and Corporate Governance, S K Bhatia
(2004), Deep and deep publications
RESPONSIBLE BUSINESS

UNIT 1
 Module 1
Ethical Responsibility of Business:
• Definition and concept of ethics and business
ethics;
• History of Ethics;
• Institutionalising Ethics; Code of conduct and
ethics for managers, Ethical Committees;
• Significance and need for business ethic;
• Ethical Decision-Making.
 Introduction
• Have you heard of recent cases of Indian startups such
as BharatPe and GoMechanic?

• It was found that many of the acts done at these firms

(and at many others firms in the past) were not what
they were supposed to be.

• These were not only against the LAW but also against
the ETHICAL CONDUCT.

• So what is ETHICS then?

 Definition and Concept
• Ethics is derived from the Greek word “ethikos” meaning
“character”.
• Thus Ethics can be defined as a code of behaviour considered
correct (Chambers Dictionary)
• In the same sense, business ethics can be defined as the art
and discipline of applying ethical principles to examine and
solve complex moral dilemmas facing businesses’.
• Normative in nature (since it deals with “what ought to be
done”)
• Can be both an art and science i.e. while there is an element
of subjectivity in what is right and what is wrong there also
exist standard rules and procedures based on which
individuals/ businesses can be termed as ethical or not.
 Personal and Business Ethics
• Personal Ethics
– Respect
– Honesty
– Fairness
– Benevolence
• Business Ethics
– Balance between economic and social objectives
– Concern towards environment
– Fairness towards stakeholders
 What is not Ethics?
• Ethics is not Religion
• While religion deals with what is right and
what is wrong, ethics deals with wider context
(such as cybercrimes, social media,
environment etc.).
• Ethics can be applied also to people who do
not subscribe to any religion i.e. are agnostic.
 What is not Ethics?
• Ethics is not Law
• Legal systems can vary from place to place
depending upon macro indicators (such as
demography) and societal beliefs whereas
ethics generally are neutral to these
indicators.
• Law can be misused whereas ethics can’t.
 What is not Ethics?
• Ethics is not Culture
• Some cultures are ethical whereas some
cultures ma be termed as unethical (for eg.
The age old culture of case system, dowry,
female foeticide can be termed as unethical)
• Law can be misused whereas ethics can’t.
 What is not Ethics?
• Ethics is not Feelings
• While personal ethics could be based on how a
person feels, feelings per se are not ethics.
• For eg. When we commit a wrong act for the first
time we may feel bad but that may not be the
case if we become habitual (reflect on the feeling
when you used unfair means in the examination
for the first time and then when it became a
habit. Did you feel the same way?).
 What is not Ethics?
• Ethics is not Science
• While Ethics is normative and may suggest
some standard rules and procedures, it is not
purely scientific.
• Also science may lead to conducts that may be
unethical. For eg. Human cloning.
 Code of Conduct For Managers
• Integrity
• Impartiality
• Accountability
• Transparency
• Honesty
 History of Ethics
• Till 1970s, Ethics was a subject primarily dealt by
theologians and philosophers and pertained to
the societal causes.
• Significant development came in 1979 when 3
anthologies on ethics merged
• Ethical Theory and Business by Tom Beauchamp
and Norman Bowie;
• Ethical Issues in Business: A Philosophical
Approach by Thomas Donaldson and Patricia
Werhane; and
• Moral Issues in Business by Vincent Berry.
 History of Ethics
• By 1980s, Ethics became a formal subject in
many universities in US and Europe
• Academic journals publishing research on
ethics also evolved during the same time.
• Hence the subject area is quite nascent,
however, important as ever.
 Importance and Need for Business
Ethics
• Ethical behavior results in trust with stakeholders
i.e. suppliers, employees and customers.
• Trust leads to predictability and efficiency of
business.
• Results in the welfare of the society.
• The old saying “The business of business is to do
business” has been improved to “The business of
business is to do ETHICAL business”.
 Significance of Business Ethics
• Some people are of the opinion that business
and ethics don’t go hand in hand.
• However, ethical practices can create higher
returns for the business and is important for
sustainability.
• If businesses follow ethical practices then it is
inculcated in the society a well. Ethical
businesses lead to ethical societies.
 In a nutshell…
Businesses should act ethically
• to protect its own interest;
• to protect the interests of the business community and
have trust from public.
• to meet stakeholder expectations
• to prevent harm to the general public
• to protect themselves from abuse of unethical
employees and competitors
• to protect their own reputations
• to create an environment where employees are driven
by the organizational values.
 Ethical Decision Making
Norman Vincent Peale and Kenneth Blanchard have
prescribed some suggestions to conduct ethical
business.
• Is the decision you are taking legal? If it is not legal, it is
not ethical.
• Is the decision you are taking fair? In other words, it
should be a win-win-equitable risk and reward.
• The Eleventh Commandment—‘Though shall not be
ashamed when found’, meaning when you are hauled
up over some seemingly unethical behavior, if one’s
conscience is clear, then there is nothing to be
ashamed of.
RESPONSIBLE BUSINESS

UNIT 2
 Module 2
• Responsibility towards Consumers:
 Consumer Duties and responsibilities;
 How are Indian Consumers Exploited;
 Legal Protection to Consumers; Consumer
Protection Act, 1986.
 Consumer- The easier scapegoat
• Many a times we see that consumers are
given substandard products and misleading
information especially during advertisement
and sales.
• The role of marketing is to make the customer
want/need the product and then have top of
the mind presence for purchase, not to fool
the customer into buying the product.
 Consumer- an important Stakeholder
• In order to maximize shareholder returns,
businesses often ignore consumers’ interests
and behave unethically on that front.
• Hence there is a need to look broader- from
Shareholder interests to Stakeholder interests
• Consumer is an important stakeholder.
 Consumer Duties and Responsibilities
• Substantiate the complaint:
– When complaining against the seller provide
appropriate evidence, such as bills, acknowledged
copies of correspondence.
– Complaints should not be vague
• Listen to the seller
– seek the opinion/viewpoint of the seller before
lodging a complaint with appropriate authorities.
– sometimes explanation of the seller may convince the
consumer
Consumer Duties and Responsibilities
• Cooperate with the seller if needed
– Don’t misuse the rights to exploit or embarrass the
seller, the first opportunity to redress the complaint
should be taken up with the seller himself; going to
the consumer court should be the last resort.
– There could be occasions when the seller himself may
be helpless, as at times when the producer refuses to
take back defective items from the seller. On such
occasions, if the seller so desires, the consumer
should join him in pressuring the producer to replace
the defective item free of cost.
 Consumer Duties and Responsibilities
• Avoid inconvenience to others
– Consumers should ensure that they do not cause
trouble or inconvenience to others (in doing agitations
etc. against the seller)
• Do not personalize issues
– complain against the system that causes them
problems, and not against individuals.
• Not lend self to others
– Consumers should ensure that they fight for their own
causes, and should not lend themselves to be used as
pawns in games played other parties for their self
interest.
 Consumer Duties and Responsibilities
• Be well informed:
– Consumers must read and understand the terms of sale before
buying goods, especially before lodging complaints.
• Understand the grievances redressal process:
– Consumers should have, to the best of their ability and
understanding, a clear knowledge as to whom they should
approach for redressal of their grievances rather than
approaching the court directly.
• Avoid impulsive buying:
– Consumers should plan their purchases well rather than going
for impulse buying.
– Opinion from others may be taken but the purchase decision
should be one’s own.
 Consumer Duties and Responsibilities
• Buy goods from authorized agents
– Purchase from genuine authorized agents, after paying
due taxes and obtaining bills and receipts.
• Other duties and responsibilities:
– No consumer should make frivolous complaints.
– He or she should avoid rumour-mongering to spite any
seller for personal reasons.
– Consumers should avoid causing damages to the seller’s
business even if they have a genuine grievance against the
seller over their purchase.
– Consumers should take it as their moral responsibility not
to pollute the environment while disposing waste
materials.
 Consumer Protection- The Indian
Scenario
• Consumer Protection measures were there even
during British Raj
• Sale of Goods Act (1930) and Agricultural
Produce (Grading and Marketing) Act (1937) were
in existence.
• After independence, two landmark legislations
were passed to protect the consumers
– Monopolies and Restrictive Trade Practices Act (MRTP
Act) 1970 (now repealed)
– Consumer Protection Act 1986
 Consumer Protection- The Indian
Scenario
• Unlike Western countries that operate free
market economy, governments in India, following
a socialist pattern, have a number of statutory
weapons to control production, supply,
distribution, price and quality of a large number
of goods and services.
• The Indian government is vested with the power
to regulate the terms and conditions of sale, the
nature of trade and commerce and so on.
How are Indian Consumers Exploited?
• Exorbitant Prices of Products and Services
• Deceptive Selling Practices
• False and Misleading Advertisements
• Defective Quality, Higher Prices
• Sale of Hazardous Products to Ignorant
Consumers
• Suppression of Material Information
• False Product Differentiation
How are Indian Consumers Exploited?
• Producers’/Sellers’ Collusion
• Supply of Adulterated and Substandard Products
• Cheating Consumers by Giving Lesser Quantity for
the Price
• Dishonoured Guarantees and Warranties
• Poor Redressal of Customers’ Genuine Grievances
• Creating Artificial Scarcity
• Making Consumer Buy Unwanted Goods
• Misleading Representation on Utility of Products
 How are Indian Consumers Exploited?
• Manipulating Conditions of Delivery
• Customers Pay for Numerous Intermediaries
• Fall in Prices—Never Passed to Consumers
• Buying Unaffordable Goods through psychological pressure
(easy credits for making lavish travel etc.)
• Advertisement Cost
• Counterfeits Constitute Substantial Quantity of Goods in
Store Shelves
• Hoarding and Black-marketing
• Tie-in-Sales (bundled srvices)
• Gifts for Products/Services (can be used in next purchase)
The Consumer Protection Act 1986
• The Consumer Protection Act, 1986 (COPRA) conferred a legal right
to the individual consumer to seek legal redress or recover costs
and damages for injury or loss suffered by him or her as a result of
faulty, defective goods and services, bought or secured for valuable
consideration.
• This act (COPRA) is applicable to all defective goods and deficiency
in service.
– ‘Goods’, under the act mean every kind of movable property, including
stocks and shares, growing crops and things attached to or forming
part of the land.
– ‘Service’ means service of any description which is made available to
potential users including facilities in connection with banking,
financing, insurance, transport, processing, supply of electrical or
other energy, boarding or lodging or both, entertainment, amusement
or the purveying of news or other information.
The Consumer Protection Act 1986
The ‘six rights’ of the consumer as enunciated under
Section 6 of the COPRA are as follows:
1. The right to safety, that is, the right to be protected
against the marketing of goods and services which are
hazardous to life and property.
2. The right to be informed about the quality, quantity,
potency, purity, standard and price of goods or
services, as the case may be, so as to protect the
consumer against unfair trade practices.
3. The right to choose, that is, the right to be assured,
wherever possible, access to a variety of goods and
services at competitive prices.
The Consumer Protection Act 1986
4. The right to be heard and to be assured that
consumer’s interests will receive due
consideration at appropriate forums.
5. The right to seek redressal against unfair
trade practices or restrictive trade practices
or unscrupulous exploitation of consumers.
6. The right to consumer education.
The Consumer Protection Act 1986
• The Consumer Protection Act also makes provision for
the establishment of the other authorities for the
settlement of consumer disputes through the
consumer disputes redressal agencies which include:
– A Consumer Disputes Redressal Forum known as the
District Forum established by the State government in
each district of the state by notification.
– A Consumer Disputes Redressal Commission known as the
State Commission established in each State by the State
government by notification.
– A National Consumer Disputes Redressal Commission
known as the National Commission established by the
centre by notification.
The Consumer Protection Act 1986
• Eligibility
– Any consumer who has bought goods or has hired or availed any service for a
consideration, who finds any defect in the quality, quantity, potency, purity or standard
of the goods; or finds any fault, imperfection, shortcoming, or inadequacy in the quality,
nature and manner of performance in relation to the service. In the event of either of
these grievances, he or she can approach the court for redressal. However, if a person
has bought the goods for resale or for a commercial purpose he or she is not a
consumer.
• Limitation and Appeals
– Within what period can a complaint be filed? A complaint should be filed at the earliest
but not later than two years from the date on which the cause of action arose. However,
the court may entertain the complaint after a period of two years if the complainant is
able to satisfy the court that there was sufficient cause for the delay.
• Appeals
– An appeal from the order of the District Forum lies to the State Commission, against the
order of the State Commission to the National Commission and against the order of the
National Commission to the Supreme Court. All appeals are to be filed within 30 days of
the order appealed against, and are to be accompanied by a certified copy of the order.
RESPONSIBLE BUSINESS

UNIT 3
 Module 3
• Responsibility towards Environment:
 Environmental Preservation: Role of
Stakeholders;
 Waste Management and Pollution Control;
 Key Strategies for Industrial Pollution
Prevention;
 Managing Environmental issues.
 Environment- The Third Bottom Line
• The traditional economic theories argue that
earning economic profits is the primary objective
of the firm.
• Later, it was argued that taking care of society is
also an objective of the firm.
• In the last few decades, environment has also
become an important parameter and figures in
the objective of the firm.
• Hence, TRIPLE BOTTOM LINE has become a
buzzword nowadays (Profits, People, Planet).
 Environmental Preservation: Role of
Stakeholders
• Preservation of a healthy environment and
ecological balances is the duty of everyone
(otherwise there would be repercussions).
• Promotion of environmental awareness
require help of different stakeholders viz.
public, media, environmental groups,
corporations, and the government.
 Public Opinion
• Public is perhaps the most important stakeholder
especially in a democratic society.
• The public has the power to support interest
groups, elect and lobby officials, pay taxes, work
for companies, buy products, and support or
reject policies.
• Public pressure can make governments change
their policy eg. Royal Dutch Shell was stopped
from rigging oil in the Atlantic Ocean owing to
public pressure.
 Media
• Media creates awareness and disseminates
information about environment issues.
• Media also becomes the voice of the people
who support environmental cause.
• However, it is important that media plays its
role in an objective way rather than being a
puppet to groups serving self interests.
 Environmental Groups
• Environmental groups are increasingly working with
the stakeholders to solve environmental concerns
rather than criticizing the governments.
• The role of environmental groups is shifting from
simply bringing attention to environmental issues
towards working to solve problems.
• These organizations are often a reliable source of
information and support and represent public
sentiment.
• Some major groups include Conservation International,
Greenpeace and Environmental Defence Fund.
.
 Corporations
• Traditionally, corporations had a singular
objective to earn economic profits with no
regards to environment.
• The key shift occurring in the environmental
regulation of industry is from an emphasis on
pollution control to an emphasis on pollution
prevention.
• Companies need to ‘go green’ otherwise they will
be unable to survive in an environmentally
conscious marketplace.
 Government
• Governments across the globe have pledged to
save the environment and have made significant
policies.
• For eg. Government of India, in its latest budget
2023, has allocated funds to achieve a target of
ZERO emissions by 2070.
• Global agreements such as the Paris Agreement
(or Accord) to reduce global warming is an
important step towards such cause.
 Waste Management and Pollution
Control
• Environmental damage through industrial activity can be of two
types:
– Depletion of natural resources: Excessive use leads to the
reduction in natural resources that are non-renewable
(minerals, fossil fuels, etc).
– Degradation of the natural resources: Degradation refers to the
deterioration of the quality of the environment. All production
creates waste and pollution right through the process of
manufacturing to the disposal of the final product. Wastes—
aerial, aqueous or solid—degrade the air, soil and water quality
and pose health hazards.
• Pollution prevention management means both management of
wastes and production before they create pollution problems
(rather than CONTROL the focus has shifted to PREVENTION)
 Key Strategies for Industrial Pollution
Prevention
• Systematic waste reduction audit
– Enables firms to trace input chemicals and to identify how much waste is generated through
specific processes.
– Useful tool in diagnosing how a firm can reduce or even eliminate waste.
• Material balance:
– Identifying processes, inputs, outputs, recycle and reuse rates, deriving a preliminary material
balance and evaluating and re-fixing material balance.
• Economic balance:
– Identifying costs and reviews to achieve an economic balance.
– According to benefit-cost ratio, experience in the industrialized countries has proved that anti-
pollution technology has been cost effective in terms of health, property, and avoiding
environmental damage and that it has made many industries more profitable by making them
more efficient in the usage of resources
• Waste reduction:
– Identifying opportunities and implementing them through simple process modifications such
as pollution prevention measures such as good house-keeping, waste reduction and recycling,
designing a waste-reduction strategy, implementing internal recycling for one’s own or others’
use, to reduce emission from the process and also to reduce the need for continued supply of
raw material inputs.
 Key Strategies for Industrial Pollution
Prevention
• Use of newer, cleaner technologies:
– Development of preventive technologies to benefit current and future
scenarios, without transferring the problem from one media to another such
as air, water and land, as is often the case. For example, waste treatment
processes produce large amounts of sludge and residue, which again would
need a disposal programme to prevent secondary pollution.
– Use of technology is the key here. Technological management can reduce the
adverse impact of many activities on the environment.
• Life-cycle assessment:
– This is a process of evaluating the environmental burdens associated with a
product or activity.
– It addresses the entire production system, not just isolated components.
– It starts by identifying and quantifying energy, the material used and the
waste released into the environment, assessing the impact of the energy and
material uses and releases to the environment and identifying and evaluating
opportunities of effecting environmental improvement
RESPONSIBLE BUSINESS

UNIT 4
 Module 4
• Responsibility towards Society:
 Theories of CSR: Trusteeship Model, Social
Entity Theory; Pluralistic Model;
 Models of CSR: Ethical Model, Statist Model,
Liberal Model & Stakeholder Model;
 Advantages of CSR; Scope of CSR;
 CSR of Stakeholders: Consumers and community,
Employees and Owners;
 Steps to Attain CSR.
 Corporate Social Responsibility
• Different from Philanthropy
• While Philanthropy proposes that businesses
should GIVE to the society, CSR proposes that
businesses TAKE resources from the society
and hence it is their obligation to GIVE BACK
to the society.
• CSR has become a legal requirement in many
countries including India.
 Propositions of CSR for firms
• Voluntarily responsible to ethical and social considerations.
• Obligations to pursue those lines of action which are
desirable in terms of the objectives and values of our
society.
• Maintain relationship with stakeholders (customers,
employees, communities, owners/investors, government,
suppliers and competitors)
• Total corporate social responsibility = economic
responsibilities + legal responsibilities + ethical
responsibilities + philanthropic responsibilities
• Social responsibility of business is temporal and society-
based.
 Theories of CSR
• Trusteeship Model
• Social Entity Theory
• Pluralistic Model
 Trusteeship Model
• While Agency theory claims that managers is the agent of shareholders
(owners), Trusteeship theory proposes that managers are trustees of the
corporation.
• The corporation is an independent legal entity different from its members
and shareholders are merely the residual claimants of the company. The
company has its own assets, rights and duties, and has its own will and
capacity to act and is responsible for its own actions. Therefore, it is
generally held that management is not the agent of shareholders.
• The trusteeship model differs from the agency model in two ways.
– First, the fiduciary duty of the trustees is to sustain the corporation’s assets,
including not only the shareholders’ wealth, but also broader stakeholders’
value such as the skills of employees, the expectations of customers and
suppliers, and the company’s reputation in the community. Managers as
trustees are to promote the broader interests of the corporation as a whole,
not solely the financial interest of its shareholders.
– Second, managers have to balance the conflicting interests of current and
future stakeholders and to develop the company’s capacities in a long-term
perspective rather than focus on short-term shareholder gains.
 Social Entity Theory
• Promoted by three major social Robert Dahl (1985) using economic
democracy, Paul Hirst (1994) using associationalism, and Jonathan
Boswell (1990) using communication notion of property.
• It regards the company not as a private association united by
individual property rights, but as a public association constituted
through political and legal processes and as a social entity for
pursuing collective goals with public objectives.
• It views the corporation as a social institution based on the grounds
of fundamental value and moral order of the community.
• The recent resurgence of the moral aspect of stakeholder
perspectives has been in general associated with the social entity
conception of the corporation.
 Pluralistic Model
• The pluralistic model supports the idea of multiple interests of
stakeholders, rather than shareholder interest alone.
• It argues that the corporation should serve and accommodate wider
stakeholder interests in order to make itself more efficient and more
legitimate.
• It suggests that corporate governance should not move away from
ownership rights, but that such rights should not be solely claimed by, and
thus concentrated in, shareholders; ownership rights can also be claimed
by other stakeholders, particularly employees.
• Stakeholders who make firm specific investments and contributions and
bear risks in the corporation should have residual claims and should
participate in the corporate decision making to enhance corporate
efficiency.
• It is asserted that if corporations practise stakeholder management, their
performance such as profitability, stability and growth will be more
successful.
 Models of CSR
• Ethical Model
• Statist Model
• Liberal Model
• Stakeholder Model
Models of CSR
 Ethical model
• In the ethical model, there is a voluntary
commitment to public welfare.
• In India, it has its roots in the Gandhian
philosophy of trusteeship.
• Examples of this model are found in the Tatas,
Birlas, Infosys, Dr Reddy’s Labs and Reliance
Industries
 Statist model
• This model is based on the state-owned public sector units
(PSUs).
• It is based on the socialist and Nehruvian mixed economy
format that India had adopted for its economy. Propounded
by Jawaharlal Nehru, this model calls for state ownership
and legal requirements of CSR.
• The PSUs provide housing and schools to workers. They
have existed in India since 1947, such as in Bhilai and
Bokaro.
• The inspiration has been drawn from the labour laws and
management principles.
• But this model is now being challenged by the trend of
disinvestment and privatization.
 Liberal model
• This is the liberal approach where the belief is
that the free market would take care of corporate
responsibility.
• It is drawn from Milton Friedman’s view which
states that a company’s responsibility lies mainly
in improving the economic bottom-line and
increasing the wealth of the shareholder.
• It is sufficient for the corporate to obey the law
and generate wealth, which can be directed
towards social ends through fiscal policy and
charitable choices.
 Stakeholder model
• Stakeholder in an organization is an individual or
a group of individuals who can affect or is
affected by the objectives and activities of the
organization.
• Hence it is important for the business to consider
the interests of the stakeholders.
• Companies are expected to stick to the triple
bottom line of economic, social and
environmental responsibility (Profit, People,
Planet).
 Advantages of CSR
• Improved financial performance
• Enhanced brand image and reputation
• Increased sales and customer loyalty
• Increased ability to attract and retain employees
• Reduced regulatory oversight
• Innovation and learning
• Risk management
• Easier access to capital
• Reduced operating costs
 Scope of CSR
• Three levels
– Market forces: Responding to the demands of the market. Managerial
decisions may involve business responding to the economics of the
market by efficiently and effectively using resources.
– Mandated actions: Government mandates or negotiated agreements
(regulatory requirements and guidelines, contracts/agreements with
stakeholders). Managerial decisions may reflect business responses to
government-mandated requirements and/or pressure group
stakeholders (e.g., unions)
– Voluntary actions: Managerial decisions may be undertaken without
outside pressure, such as in voluntary social programmes.
• CSR addresses issues related to community, assistance in solving
community problems; health and welfare; education; human rights;
natural environment; and culture (i.e., music, arts, sports, etc.).
 CSR of Stakeholders
• Consumers and community
• Employees
• Owners
 Consumers and community
• Goods must meet the requirements of different classes, their tastes and purchasing power.
• Goods must be reasonably priced, must be of dependable quality and of sufficient variety.
• Provision of after-sales service advice, guidance and maintenance.
• A fairly widespread distribution of goods and services among all sections of consumers and
community.
• Provision of free competition and prevention of concentration of goods in the hands of a limited
number of producers or purchasers or groups.
• Present a ‘good image’ in the minds of the public for honesty and integrity of character.
• Advertising policy should be based on moral/ethical principles. It should not mislead by false,
misleading and exaggerated advertisements.
• Support to educational, charitable and other programmes for the benefit of the community.
• Social accountability to consumers and public regarding the business conditions.
• Avoidance of social and moral dangers of ‘high spots’ and ‘social tensions’.
• Should be a law-abiding citizen of the State.
• To pay its dues and taxes to the state fully and honestly.
• Maintain impartiality towards political affairs, that is, to abstain from direct political involvement;
and not to support political parties.
• To follow honest trade practices, and avoid activities leading to restraint of trade and commerce.
• To try not to contact public servants for selfish ends.
• To sell commodities without adulteration.
 Employees
• Promote a spirit of cooperative endeavour between employees and employers
through participation in decision making and in improving production and
administration.
• To pay fair and reasonable wages to labourers and fair salaries to executives.
• To develop and adopt a progressive labour policy based on recognition of
genuine trade union right; settlement of disputes and conciliation; to create a
sense of belonging to the business, and improving human qualities of labour
by education, training, living conditions, housing, leisure and amenities.
• To provide reasonable and just work conditions.
• To recognize the labourer as a ‘human being’ and respect his dignity, and to
preserve his or her individual liberty.
• Provide facilities for joint consultation and collective bargaining.
• Help development of proper leadership from among the employees.
• Guarantee religious, social and political freedom to workers to take part in
civic activities.
 Owners
• To provide a fair return or dividend on the capital
invested.
• Give fair and impartial treatment to all.
• Develop healthy cooperative business
relationship between different businesses.
• Check the advance of such unfair practices as
price-rigging, undercutting, patronage, unfair
canvassing and unethical advertisements.
• Help in the control of monopoly and promotion
of healthy competition.
 Steps to Attain CSR
The International Chamber of Commerce recommends the following
nine steps to attain CSR
1. Confirming CEO/Board commitment to prioritize responsible
business conduct
2. Stating company purpose and agree on company values
3. Identifying key stakeholders
4. Defining business principles and policies
5. Establishing implementation procedures and management
systems
6. Benchmarking against selected external codes and standards
7. Setting up internal monitoring
8. Using language that everyone can understand; and
9. Setting pragmatic and realistic objectives.
RESPONSIBLE BUSINESS

UNIT 5
 Module 5
• Corporate Governance for Responsible Business:
 Definitions of Corporate Governance;
 Market Model & Control Model of Governance
 Issues in the corporate governance;
 Relevance of corporate governance;
 Benefits of good corporate governance to a corporation; Benefits to Society
 Concept of corporation and corporate;
 Characteristics of Corporation
 Theories of corporate governance- Agency Theory, Stewardship theory,
Stakeholder and sociological theory, Criticisms;
 Good Corporate Governance: Obligation to Society: Obligation to
Employees; Obligation to Customers;
 Corporate Governance Systems: The Anglo-American Model of
Governance, The German Model of Governance, Indian Model of
Governance
 What is Corporate Governance
• Concerned with relationship among stakeholders to ensure
• Control and the strategic direction (effective strategic decision making)
• performance of organizations (effective management of the firm)

• “Corporate governance is concerned with holding the balance between

economic and social goals and between individual and communal goals……
The aim is to align as nearly as possible the interests of individuals,
corporations and society.”
Sir Adrian Cadbury
• Corporate governance involves a set of relationships between a company’s
management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the
company are set, and the means of attaining those objectives and monitoring
performance are determined.”
OECD
 Why it gainedimportance
• Rise in the number of entities
• In the absence of a governance
framework, rise in the cases of
corporate scandals and frauds
• Hence it led to loss of trust of investors
• Globalization
• Increased cross-border investment opportunities
with little knowledge about
the regulatory framework of overseas investments
 Features of CorporateGovernance
• Legal Obligations towards the stakeholders
• Fair and Transparent working
• Relationship with Stakeholders
• Protection of Shareholder Interests
• Universal application (practiced by
companies globally)
• Means rather than the end (an instrument
to improve corporate process, strategy)
• All round process
 Rationale of havingCG
• Boosts Investors’ confidence in the firm
• Boosts Corporate Image and Growth Prospects
• Mitigate Risk (especially financial risks)
• Ensure Accountability to stakeholders
• Improves credibility (ensures easy access to
capital)
• Managing Conflicts (internal and external)
• Effective management of Globalized firms
 Essentials of a goodCG
• Obligations towards Society
• Abide by Law & Order, Regulations
• Ethical Conduct
• No harm to society or social fabric (CSR)
• Environmental friendliness

• Obligations towards Investors

• Equitable treatment of shareholders (registration,
voting rights etc.)
• Information and Communication flow to shareholders
• Financial reporting and analysis
 Essentials of a goodCG
• Obligations towards Customers
• Quality of products
• Affordability
• Customer Satisfaction

• Obligations towards Employees

• Fair employment practices
• Equal-opportunities employer
• Encouraging whistle blowing
• Humane treatment
 Pillars of CorporateGovernance
• TRANSPARENCY
• Timely disclosure of relevant information
including financial performance, ownership,
and governance.
• ACCOUNTABILITY
• Of board and management towards shareholders.
• FAIRNESS
• Equitable treatment to shareholders, effective redressal
mechanism for grievances
• INDEPENDENCE
• Free from influence, managing conflict of interest.
• SECURITY
• Ensuring security and privacy if customer data
(relevant for data firms such as Facebook,
LinkedIn etc.)
 Governance Chain
• McKinsey defined two types of governance
chain
– Market model
– Control Model
Market Model
 Market Model
• In this model, there are efficient, well-developed
equity markets and dispersed ownership, something
common in the developed industrial nations such as
the US, UK, Canada and Australia.
• Corporate governance is basically how companies deal
fairly with problems that arise from ‘separation of
ownership and effective control.’
• This model illustrates conditions and governance
practices that are better understood and appreciated
and as such highly valued by sophisticated global
investors.
Control Model
 Control Model
• In this model, governance chain is represented by
underdeveloped equity markets, concentrated (family)
ownership, less shareholder transparency and
inadequate protection of minority and foreign
shareholders, a paradigm more familiar in Asia, Latin
America and some east European nations.
• In such transitional and developing economies there is
a need to build, nurture and grow supporting
institutions such as a strong and efficient capital
market regulator and judiciary to enforce contracts or
protect property rights.
 Theories of corporate governance
• Agency Theory
• Stewardship theory
• Stakeholder
• Sociological theory
 Agency Theory
• In modern corporation, where share ownership is
widely held, managerial actions depart from those
required to maximize shareholder returns.
• The owners are the principals and the managers
are the agents and there is an agency loss, which
is the extent to which returns to the owners fall.
• Disadvantages:
• The opportunism or self-interest of the agent; he/she
does not act in the best interests of the principle, or acts
partially in the best interest of the principle.
• Information asymmetry; agent has more information.
• Agency cost
• Specifies mechanisms that reduce agency loss:
• Fair and accurate financial disclosures
• Efficient & Independent BoD
 Stewardship Theory
• Assumes that managers are basically
trustworthy and attach a significant value to
their own personal reputations.

• Defines situations in which managers are

stewards whose motives are aligned with
the objectives of their principles.

• Control can be detrimental because it

undermines the pro- organizational
behaviour of the steward by lowering
his/her motivation.
 The StakeholderTheory

• Shareholder approaches argue that corporations

have limited duties/responsibilities i.e. obeying the
law & maximizing shareholder wealth.
• But..
• The Stakeholder theory is grounded in many
normative, theoretical perspectives including ethics
of care, the ethics of fiduciary relationships, social
contract theory, theory of property rights and so on.
• Many stakeholders: difficult & challenging
• Agents may divert wealth of principals to
other stakeholders.
 Sociological Approach
• The sociological approach to the study of corporate
governance has focused mostly on board composition
and the implications for power and wealth distribution
in society.
• Problems of interlocking directorships and the
concentration of directorships in the hands of a
privileged class are viewed as major challenges to
equity and social progress.
• Under this theory, board composition, financial
reporting, disclosure and auditing are necessary
mechanisms to promote equity and fairness in society.
 Corporate Governance Systems
• The Anglo-American Model of Governance
• The German Model of Governance
• The Japanese Model of Governance
• The Indian Model of Governance
 Corporate GovernanceModels
• Management to run the business; Board to
see …being run well and in right direction
• Three most popular systems/models
• The Anglo-American Model
• The German Model
• The Japanese Model
Anglo American German Japanese
Share holders Shareholders and Shareholders and
employees /unions banks

Elects Elects Elects

Board of Directors Supervisory Board Supervisory Board
appoints President And
President
Appoints & Supervise Appoints Appoints
Officers/Executive Management Board Executive Board
Manage Manage
Manage

Company Company Company

Indian Model = Anglo American Model +German Model

 The Anglo-American Model (Also Anglo-Saxon)

• Unitary board model: one BoD including

• Executive directors
• Non-executive directors
• Used in USA, Britain and commonwealth
countries
• Focus on mainly on Shareholders
• Companies Typically run by professional
managers
• Eg. Unilever
The Anglo-American Model (Also Anglo-Saxon)
 The German Model

• Two-tier board model

• Supervisory board (50% by Shareholders;
50% by labour unions)
• Management Board
• Also termed.. Continental European
Approach
• Popular in Germany, Holland, other EU
countries
• Eg. Siemens
The Japanese Model
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